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Author: Deborah Harrington

What is ‘the economy’? If you listened to George Osborne, or every Chancellor since 1979, you would be forgiven for gaining the impression that it is all about ‘debt’ and ‘deficit’ and how the country has to ‘live within its means’ and ‘pay down its credit card’. But under his chancellorship inequality soared, public services were de-funded, the UK failed to recover its living standards post-crash, and it has suffered the biggest drop in average real wages of any OECD country except Greece – not a glowing recommendation for a ‘professor’ of economics.

Whilst accepting that living within your means is probably a good rule for households (if you can manage it!) the reality is that a government like ours with its own currency and its own central bank is not at all like a household. And the economy is a far broader subject, covering not just what the government spends but what we spend too, as private individuals including how much debt we get into. After all it was private debt, not public, that caused the 2008 crash.

Here we reprint, with kind permission, Dr Steven Hail’s position paper for the National Health Action Party explaining what the difference is. Dr Hail is an economics lecturer at the University of Adelaide and a proponent of Modern Monetary Theory. MMT is not a political theory, but an explanation of how money creation works. This paper is a primer for those unfamiliar with economics and it demonstrates the way in which we are told lies every day about what is and isn’t good for the economy.

Paying for public services within the UK financial system

If the UK was to spend more than the currently budgeted £143 billion on the healthcare system this year it would be good to know how that spending is to be financed. More generally how is the £784 billion of general public spending which is currently budgeted for going to be funded? Do the various charts you see linking the total tax take and government borrowing to items of government expenditure make any sense? If not, then why not?

The conventional view is that public spending must be paid for through taxation, government sales of assets, and issuing government bonds – in other words, through taxes now, ‘selling off the family silver’ now, or borrowing at interest now money which will have to be repaid in the future, and presumably setting up a burden of additional taxation for future generations.

Your reaction to this conventional answer might be a right wing one, which is to say, austerity to keep government spending down and privatisation, in order to keep taxes low: or a left wing one, which is to say, tax the rich and the multinationals much more highly, because the Government needs more money from rich people so it can pay for our public services.

Both the right wing reaction and the left wing reaction are wrong, or at least misleading, because they are based on that conventional view of public sector finance which I mentioned above. It is a conventional view which suits many people on the right, but is also (wrongly) accepted as being valid by many people on the left. It is – and this might surprise you – a view which the majority of highly credentialed economists, including Nobel Prize winners, know to be incorrect, but which many of them justify as a mechanism for imposing some restraint on politicians. They believe that if politicians only knew the financial options which are actually available to them, they would abuse these freedoms, ‘spend like drunken sailors’, and wreck the economy.

I don’t believe there is ever a good reason for remaining in ignorance about something this important, and I think we have other ways of restricting what politicians do than telling blatant lies to the public, so I want to share the truth with you.

To keep this as brief and as straightforward as I can, I am not going to dwell on the current institutional practices, conventions and rules, as they are applied in the UK in 2016. Current practices are not exactly what they were before the Financial Crisis of 2008, and they are very different indeed from how things were done before 1979. All the sets of conventions and rules which have been applied down the years have, to a greater or lesser extent, obscured the truth about public finance, which I can summarise in two sentences. Let’s call them two ‘laws’ of public finance.

1) A government with its own currency (like the pound), its own central bank (like the Bank of England), a floating exchange rate, and no foreign currency debt, faces no financial budget constraint at all.

2) Such a government faces real and ecological constraints, but no financial constraint.

Let’s be clear what we are talking about here. We are not talking about Greece. We are not talking about an independent Scotland, if Scotland were to keep the pound or join the euro (which I have recently advised a Scottish political party to stop saying they would do). We are talking about a genuine ‘monetary sovereign’. We are talking about the USA, Japan, Australia and the UK, among many others.

The British Government is a monetary sovereign. Every time the British Government spends a pound, it does so by crediting the reserves of a commercial bank which are held at the Bank of England by that pound, and having the commercial bank credit the bank account of whoever has been the beneficiary of that spending. In other words, every time the Government spends, it creates money.

Not some of the time – every time. All government spending creates money, and all this money is created using the equivalent of keystrokes on a computer.

The Government does not need to receive your money in taxes, or borrow your money by selling bonds, or raise money from you by selling you shares in British Gas etc…..before it spends. Think about it for a moment. It isn’t, in a literal sense, your money in the first place. Who issues the currency? The Bank of England. And who owns the Bank of England. The UK Government. The Government doesn’t need to collect its money, which it creates, from you, before it can spend.

Every time the Government spends, it creates some of its money for the purpose. I know commercial banks create a great deal of deposits for themselves, and a great deal of what is normally defined to be ‘the money supply’ by lending to their customers, but they can only do this because they have access to Government money, in the form of their reserves at the Bank of England. There are two ways for this money to be created. One is the Government spending this money (permanently) into existence, and the other is the Bank of England lending this money (temporarily) into existence.

We have come to the answer to our initial question. How can we pay for an increase in health spending? The same way that we pay for all public spending. The Government will spend the money into existence. The way the accounting is done these days, and current institutional practices, obscure this truth, but they do not change the fact that it is a truth. It is not a theory. It is a plain fact.

Let me put it more simply. Money does not grow on trees. It is easier than that. Money comes from nowhere. It exists mainly in the form of electronic entries on spreadsheets (these days), and you can say it is typed into existence. The UK Government can no more run out of pounds than the scorer at Lords can run out of runs, the next time my Australian boys come over there to win the Lords’ test match. In this sense, the Government really does have a ‘magic pudding’.

You might ask me whether I am talking about ‘printing money’ to pay for government spending. You might conjure up visions of Zimbabwe or Weimar Germany. I’ll deal with those briefly in a footnote below, but let us be clear – in a sense, all government spending always involves ‘printing money’.
Except, I hate using that term, because of its associations, and because it is a little misleading. Very little money is actually printed, remember – it is nearly all electronic these days.

The question is, then, why do governments tax people at all? Taxes do not ‘pay for government spending’, after all. Taxes do not pay for the education service. Taxes do not pay for the NHS. It might make you feel better to know that your taxes are not paying for nuclear weapons. They really aren’t. The Government doesn’t need to get money from rich people before it can spend. Your taxes, in a literal sense, do not pay for anything. Taxes, at least in a monetary sovereign state, pay for nothing at all.

So, why do we pay taxes? There are many distributional, or microeconomic, functions which the tax system fulfils. However, at the macroeconomic level, the purpose of taxation is very simple. It is necessary for people to pay taxes to destroy (to use a provocative word) some private sector spending power, to make room within the economy for the government to conduct its desired spending on public goods, without pushing total spending in the economy beyond the productive capacity of the economy and causing inflation. Taxes limit inflation, helping us to maintain the spending power of money, so that people maintain their confidence in the value of money.

We have reached the second law I wrote down above. As a society, we cannot run out of pounds, but we can run out of people, skills, technology, infrastructure, natural and ecological resources. There are limits – but the limits are ‘real’ and not financial. When planning for the future, governments should use their freedom from financial constraints to plan wisely to manage the real and ecological constraints which will always be with us.

The Government, then, cannot spend without limit, because it would push total (private sector plus public sector) spending beyond the current capacity of the economy, and be inflationary. So we have to pay taxes.

This does not, however, mean that governments need to ‘balance the budget’, or should ever attempt to balance the budget, or limit its deficit to a specific proportion of GDP. In fact, the British Government has hardly ever run balanced budgets or budget surpluses in modern times, and this has tended to be just prior to economic downturns. You can see that in the following chart:

This is not only true for the UK. It is true almost everywhere, with almost all the exceptions being relatively small and oil rich countries, like Norway. In the case of Norway, what makes it possible for the government to run fiscal surpluses is not the ‘sovereign wealth fund’ you may have heard about. It is simply Norway’s consistently large trade surplus with the rest of the world.

Most governments most of the time historically have run budget deficits. This is essential, because if the rest of us want to build up our savings in pounds (including foreigners in ‘the rest of us’) it turns out the UK Government will be forced, on way or another, to run a deficit. A good deficit will prevent a recession from happening, and a bad deficit would be the result of a recession happening and tax receipts crashing while welfare payments rise, when everyone wants to save and not spend. To explain the logic properly would mean going into too much detail here, but believe me it is a mathematical (or accounting) fact of life.

Doesn’t all this mean the Government getting further and further into a burdensome ‘debt’, which future generations will have to repay, so that government borrowing is somehow immoral, and especially so if it isn’t to pay for investments in the future?

Not once you understand that monetary sovereign governments can’t and don’t really borrow in their own currencies, at all, in the conventional sense of the term. When you or I, or a business, of a local authority, borrow in pounds, then later on we will have to repay that debt and the interest on it, or we will go broke. We are (obviously) not monetary sovereigns. We face a financing constraint.

It is different for the UK Government. I have already said that the Government spends new money into circulation, and then uses taxes to destroy some of that money so that there won’t be rising inflation. Ideally, the Government should spend more than it taxes, when it is running a deficit, to ensure that total spending in the economy is at the right level to maintain full employment. The total level of public spending, how it is divided up between public goods, and the structure of the taxation necessary to limit inflation, are then political issues.

Until the Global Financial Crisis, and before the Bank of England started doing quantitative easing, it was necessary for the Government to sell government bonds to more or less match government spending net of taxes, in order to keep control of interest rates. The reasons are a bit dull, but if you bear with me I will try to explain.

Interest rates in general depend on the interest rate banks charge each other when they lend each other money for liquidity management purposes for very short periods of time. A fiscal deficit feeds cash reserves, or liquidity, into the banking system. In the past, it was necessary to remove those reserves again by selling government bonds, or this interest rate would fall below the level the Bank of England wanted it to be at. Banks with plenty of reserves of cash don’t need to borrow from other banks. Sales of government bonds were about keeping the supply of cash to the banking system limited to the right level to stop interest rates falling.

That’s all changed now – at least in the UK, the USA, Japan and the Euro-zone. The Bank of England, like those other central banks, first cut interest rates to virtually zero, after the Financial Crisis, and then used quantitative easing to deliberately flood the banks with cash reserves, by purchasing large amounts of (mainly government) bonds from the private sector. The so-called ‘bank rate’ is now not a rate of interest at which private banks lend to each other – it is now the rate of interest the Bank of England pays on the huge amount of reserves the commercial banks have on deposit with it. Rather than seeking to limit those reserves, the Bank of England has been deliberately increasing them.

Yet the old practice of the Government selling its bonds goes on. It is a bit ridiculous at the moment, because as the Government is selling new government bonds – in the conventional view, to raise money – the Bank of England (owned by the Government, remember) is buying those same government bonds second hand from the private sector, to increase the amount of money in bank reserve accounts. Very strange, and anachronistic. Economists like me view it as something of a muddle.

We have learned in recent years that there is no genuinely good reason for selling government bonds at all, if you are a monetary sovereign government. Indeed, it would be better to convert them into term deposits at the Bank of England, and to regard them as a form of money.

After all, at the moment bank reserves held at the Bank of England are (in an accounting sense) government liabilities, on which the Bank of England as part of the Government pays interest, but are not seen as government debt: government bonds are also government liabilities, on which the Bank of England on behalf of the Government also pays interest, but they are seen as government debt.

Moreover, when the Bank of England, as a part of QE, buys government bonds from the private sector, it is just swapping one interest bearing government liability for another. No wonder QE doesn’t work! It isn’t ‘free money’ at all. It is basically swapping too very similar assets for each other. The private sector used to own government bonds and receive interest. The private sector now owns reserves at the Bank of England, and still received interest. Why would that act as much of a ‘stimulus’ for the economy? Why, indeed?

To cut a very long story quite short:

1) When the Government spends it creates money.

2) When the Government taxes it destroys money.

3) Government ‘debt’ should not be thought of as ‘debt’ in the conventional sense at all. It is better thought of as a form of money.

4) The Government cannot run out of money, and as long as it doesn’t guarantee to convert its money at a fixed rate into anything it could run out of, it faces no financial constraints at all.

5) It faces real and ecological constraints, because we can run out of people, skills, technology, equipment, infrastructure, natural resources, and ecological space.

6) The Government is NOT a household and is NOT a business, and has nothing at all in common with a household or a business, where financial matters are concerned.

7) When progressives understand this and start framing their arguments in this light, I believe they will be able to argue their points far more effectively and persuasively, and free themselves from what are sometimes called ‘neoliberal dogmas’ (i.e. conservative and ‘new labour’ nonsense).

Understand all this, and I hope it will change your perspective on many things, and ought to make you a great deal more confident when dealing with interviewers. If they approach you using the conventional view as a frame, remember it is because they have never really thought these issues through, or because they are being dishonest for some reason (sometimes it is a mix of the two, and people can, of course, be dishonest with themselves, or at least suffer from cognitive dissonance).

Footnote: Mugabe’s Zimbabwe and Weimar Germany

Zimbabwe 2008

If you engage in a poorly planned and violent land reform, regardless of your motivation, there will be consequences. Zimbabwe’s government managed to wipe out its vital agricultural system, while at the same time alienating most high income country governments, and facing sanctions. The supply of food failed. The Government then (literally) printed vast amounts of money to buy nonexistent food, and inevitably the price level sky-rocketed. Ever higher prices then led to ever more money being printed, so that at least the friends of the government and the army could be provided for. The result was hyperinflation. The lesson is that if you destroy the supply side of your economy and try to make up for it by printing loads of money, you will be able to create hyper-inflation. Zimbabwe 2008 has no lessons for the UK 2016.

Germany 1923

Germany’s productive capacity had been destroyed by war and by the resolution of that war. In addition, Germany had been required to pay vast amounts of gold to its former enemies. The only way to obtain the gold was to buy it, using marks which could then only be spent into a German economy already on the brink of famine. There were some other issues too, but basically it is similar to Zimbabwe 2008. If you destroy the supply side of an economy and then print loads of money, you will push depending far beyond the productive capacity of the economy and create inflation.

At approximately 2000 words this is a long read. It is designed to be read without needing to click through the links, but they will provide evidence and/or context to this blog, if you wish.

We all like human stories and in the NHS there are plenty, tales of everyday – and extraordinary – heroism by its dedicated staff alongside tragedies and failure of the system. There are the immediately understandable stories of privatisation, too, such as Virgin taking over children’s services.

But the structures and organisation of the NHS are rarely in the headlines. They lack the human element that catches our attention. After all, other than NHS managers, who is concerned as long as the NHS stays ‘free at the point of need’ as we are constantly told by politicians, think tanks and NHS leaders?

But it is in its structures and its organisation, not in its de-funding and outsourcing that the NHS is perhaps in gravest danger. This is a project long in the making and the ground has been prepared and developed by every government over at least the last 30 years.

The American health care industry and their representatives’ role is key to understanding what has happened, what is happening, and what is about to happen. This is nothing to do with Donald Trump and Theresa May and what trade agreement nightmares they may dream up in the future. This is here and now.

What are we talking about when we talk about the NHS?

The NHS is no longer a unified organisation as we tend to think of it. The NHS Confederation, a membership body, describes itself as representing 560+ organisations from the statutory, voluntary and commercial sectors which comprise ‘the NHS’ and as the sole voice that speaks for them all.

All of them, regardless of which sector they come from, run as businesses and the contracts they hold are won in a competitive market. They operate under and hidden behind the NHS ‘logo’, now used as a kitemark for a myriad of services, some of them profit-making, rather than the name of a single organisation dedicated to the health of the public, as it used to be.

The business model and the ‘bottom line’ of their profit-and-loss accounts dominates their planning. As an example Salisbury NHS Foundation Trust’s Strategic Plan 2014-19 discusses their deteriorating market share and how they will address it with a market analysis of their competitors which includes other NHS Foundation Trusts and private sector hospitals.

This competition is most visible – and often most campaigned against – when clinical contracts or the running of hospitals is awarded to the private sector, Circle and Hinchingbrooke Hospital or Virgin’s many contracts totalling £1bn++.

But it is in the organisational structures that manage the competitive system that the most profound effects and costs are seen. Tendering exercises are long and costly and can even fail at great expense. The contract which was under negotiation in Stafford for cancer care could not be concluded, but still cost £840,000. Cohorts of lawyers, accountants, management consultants, estate agents and commissioners are needed to run a commercial system, each of which is itself a commercial profit making business. Meanwhile uncertainty about the future and long term planning pervades the service and instability grows.

This system is the antithesis of the ethos of the NHS. Designed as a co-operative and integrated publicly owned and delivered system which served health needs, not business constraints, the NHS delivered universal, comprehensive and accessible care with good outcomes at low cost. The market and private sector competition promoted as both efficient and cost saving has, in fact, reduced the ability to offer a full range of services and forced the closure of hospitals and GP practices as uneconomic to run. Funds which should be targeted on front line services are diverted into the profit streams for the companies running the system.

But this is commercialisation, not Americanisation. However, having altered the structure to more resemble the mixed private/public services across the rest of the world, with increasing numbers of contracts going to the private sector another new – and costly – reconfiguration of the NHS is taking place. This now fragmented and commercialised group of bodies is in the process of being drawn together into US style ‘Accountable Care’ systems (or organisations) which are being put on the international market as large scale contracts covering multiple services in one fell swoop.

United Health and the NHS and Accountable Care

UnitedHealth Group and its subsidiary, UnitedHealthcare Medicare & Retirement are the USA’s largest provider of Medicare Advantage plans. They deliver these plans through Accountable Care Organisations.

According to United Health’s website they currently “support the National Health Service by partnering with health commissioners to provide health data, intelligence and information, enabling more effective and timely decision-making in the areas of: risk stratification, integrated care solutions, commissioning support services, referral facilitation services and enhanced quality in the management and prescribing of medicines.”

They have other links with the NHS too. Simon Stevens spent 10 years working for United Health of America in some very prestigious posts, ending up as executive Vice President of the UH Group before he took up his NHS England role. United Health was an NHS primary care provider during Stevens’ previous tenure at the Department of Health.

United Health is one of NHS England’s favoured contractors on its ‘Lead Provider Framework’ organisations which supply commissioning support services to the NHS. The capture of backroom and advisory positions is an even more fundamental level of privatisation and of Americanisation than contracting out clinical services.

And he announced “the start of an international buddying programme. Five NHS trusts (…) will from this year be partnered with Virginia Mason in Seattle, perhaps the safest hospital in the world. But we will not stop there: if we want to be the best we must learn from the best – whether Kaiser Permanente in California, the Mayo Clinic, Alzira in Spain, Apollo in India or anyone else”

Virginia Mason’s ‘lean’ management system, based on Toyota’s car manufacturing, was criticised in the HSJ (Health Service Journal) and Dr Clive Peedell, co-founder of the National Health Action Party, produced a comparison between Virginia Mason’s own performance and his own Trust which cast a lot of doubt on the reasonableness of paying $13 million for its advice:

Accountable Care Organisations appeared in Simon Stevens’ 5 Year Forward View in October 2014. On 1 March this year, during a House of Commons Public Accounts Committee session, he announced the potential candidates for the first Accountable Care Systems, which are destined to end up as ACOs. Jim Mackey, NHS Improvement’s CEO, confirmed just a few days ago which organisations would definitely be going ahead.

The final list excluded Greater Manchester and Northumberland which had appeared on the original. In fact Greater Manchester had put its first Local Care Organisation out to international tender on the 14 March “to deliver sustainable, high quality, safe and affordable prevention, primary, community, secondary health and social care services, through a blend of direct and sub-contracted provision”, just two weeks after the initial announcement was made. The contract is worth £6bn over 10 years.

In the West Midlands the Dudley Clinical Commission Group, also not mentioned on Stevens’ list, put out a tender on June 9 – the day after the general election – worth £5bn over 15 years for a Multispeciality Community Provider (MSCPs) another US import and part of the 5 Year Forward View.

The World Economic Forum driving the US model globally

Dudley CCG’s document entitled ‘New Care Model value proposition (VP)’ submitted to NHS England in February 2016 states that ‘a review of experience from the creation of Accountable Care Organisations in the United States (our bold) has fundamentally influenced our approach to evaluation’. They go on to say ‘as our 2015/16 VP showed, we articulated the value of our programme using a similar framework to that used by Bain & Co to guide this submission.” So a clear statement that the US model was the influence and the framework was from one of the ‘Big 3’ US global management consultancies.

Bain & Co describe themselves as the leading consulting partner to the private equity industry and its key stakeholders and as a strategic partner and active member of theWorld Economic Forum.

Simon Stevens is also a participant in the World Economic Forum. The following is an extract from the WEF press release on 27 April at this year’s meeting:

“New York — A diverse group of leading stakeholders in the $7.6 trillion global healthcare sector are calling for a major overhaul of healthcare systems, designed to deliver improved patient outcomes at lower cost. The proposal hinges on “value-based healthcare”, a patient-centric system that focuses on outcomes that matter to patients across the care spectrum. The recommendations are presented in a new World Economic Forum report, Value in Healthcare: Laying the Foundation for Health-System Transformation, released today in collaboration with Boston Consulting Group, and to be implemented in four pilot locations, starting in Atlanta (USA) this year. (…)

It is the first time that such a diverse group of leaders have aligned on a system-level approach to healthcare reform.”

The companies which formed this ‘diverse’ group are almost all suppliers to the NHS and are US global companies with the exception of Takeda which is Japanese global. Simon Stevens is also a contributor in his role as CEO of NHS England.

These companies are putting forward a joint redesign programme for health care in partnership with the CEO of the NHS but which is not at all about promoting the NHS’s unique brand of comprehensive, universal, accessible, high quality care, available according to need not ability to pay. Instead it is promoting the US model – which is being rapidly, and currently, imported to replace the NHS.

The US system of healthcare is not designed on the same principles as the NHS. It is one of the most costly and inefficient health systems in the world, denying or restricting care to many of its citizens. The global corporations influencing this move and embedded in the redesign do not share the principles of the NHS: they are seeking a profit-share from public funds. The unvarnished truth is that there are riches in public services if they can be turned away from their principle purpose to serve the public. Within certain constraints the government cannot allow services to fail completely, so risks are low and the potential gains are high for the private sector.

The Health and Social Care Act of 2012 de-nationalised the NHS. By 2020 the American model will be embedded. The most efficient and effective healthcare is a national health service that is publicly owned, provided, delivered and accountable. Private companies by their nature are not as accountable, by their nature they must have profit as a priority. Public ownership means oversight, real accountability and care. Profit is not a factor. There has been over 30 years of collusion on this agenda from all our main political parties. It is time to reverse the trend of destruction and move forward to a modern, first class public service.

It is both a sobering thought and a salutary warning that on the day we were setting up our first blog a tower block in London went up in flames, costing many lives and injuring others.

We are Deborah Harrington and Jessica Ormerod, former policy advisors to the National Health Action Party. The NHA is focussed on the NHS, with an expanded policy range on the social determinants of health. That is to say policy with a broad public service remit – education, housing and more – which create the bedrock of a healthy society.

From that background we have developed our interests in the inter-connectedness of many public service issues. The patterns of dis-investment and privatisation of both property and service delivery appear across all areas. As Public Matters we are continuing to research and inform on the consequences of that process; to highlight the similarities in different service areas and to add our voice to raising the alarm on the loss of the public voice and public influence in matters of public service.

We are starting as a blog and our initial main focus will remain the NHS but we are expanding our research capabilities to become information providers for decision makers across the public sector. It is a high ambition, but one thing we have learned is that there are too few organisations of any kind which champion the ethos and values of public service. It is a serious loss to the national debate.

This was simply to be our blog introducing ourselves, but Grenfell Towers highlights our objective with a terrible clarity.

Grenfell Towers is not an anomaly, not an accident. There are terrible events happening across the public sector which should not be happening and which are the result of the withdrawal of political support for public service and regulation.

Health and safety officers as well as residents had warned Kensington & Chelsea, their local authority, of the serious fire risks in the building. They had been ignored.

The essential public services which should have offered support in all these cases and many more have been disabled. The very fact that lives depend on them illustrates that they are indeed essential, not optional.

We don’t believe any lives should be lost because public sevices are no longer sufficient for their purpose. We are Public Matters because we believe above all that the public matter.